Danske Daily: Greek Agreement, Euro Strengthens, US Yields Move Higher

Eurogroup Finance  Ministers have reached an agreement  on  the second bailout package for Greece

Funding gap closed by larger write-down for private investors, lower interest rates on Greece’s loans and contribution from ECB’s profits on its Greek bonds

There has been a slightly positive impact on risk sentiment – EUR has strengthened and European stock markets are expected to open slightly higher

Markets Overnight
The Eurogroup Finance Ministers in the early morning hours reached an agreement on a second bailout package for Greece. The deal still includes only EUR130bn in new loans from the other euro area countries. The extra money needed in order for Greece to reach a debt-to-GDP ratio close to 120% in 2020 will mainly be provided by an additional write-down on private investors’ government bonds (raised from 50% to 53.5%), a further reduction in the interest rates on the loans from the eurozone countries that were part of the first bailout package for Greece (interest rate will now be 150bp above euribor) and finally Greece is expected to benefit from an arrangement in which the ECB distributes its profits on its holdings of Greek government bonds to national central banks and governments. 

According to Finance Minister Schäuble Greece has also accepted that the disbursements of aid will be paid into an escrow account that will give priority to payments on Greece’s debt before releasing money for its national budget. It is not yet clear to what degree the agreement will include tighter monitoring mechanisms.

The final details of the PSI-debt-swap agreement have not been released yet. However, according to the Head of the Eurogroup, Jean-Claude Juncker, the new Greek bonds will be a coupon of 2% in 2014, 3% from 2015-2020 and 4.3% after 2020. It has also been announced that Greece will introduce a collective action clause on existing bonds.

The announcement of the deal has been slightly positive for risk sentiment. The US stock market  was closed for Presidents Day yesterday, but US stock futures have moved slightly higher on the back of the announcement of the deal. There has only been a modest impact on  the  Asian stock markets,  with Nikkei and Hang Seng both down 0.3%.

US bond yields have moved slightly higher in Asian trade with 10-year US bond yields up by 3bp to 2.04% since trading started.

In the FX market EUR/USD jumped from 1.319 to 1.327 after the announcement of the deal, but EUR has only strengthened slightly since the markets closed in Europe yesterday. JPY has also weakened across the board since market close in Europe yesterday and USD/JPY is this morning trading 79.72. In the Scandinavian currencies SEK has strengthened slightly since the announcement of the deal.

Global Daily
Focus today:  The markets will be studying the details of the second bailout package for Greece. The agreement is very much as expected so we anticipate only a slightly positive reaction. This should pave the way for the publication of the PSI-deal and whether Greece will implement a collective action clause on existing Greek government bonds. EU Finance Ministers are scheduled to meet at 09:00 CET in connection with the Ecofin meeting in Brussels. Otherwise we have a very light calendar today, with probably only euro area consumer confidence for February able to attract some attention in the market .

Fixed income markets: A Greek deal has been announced overnight. Although this was widely expected, it should be slightly positive for risk appetite today and we expect some moderate pressure on the long end of the curve in the safe-haven markets. Remember that the deal needs approval in local parliaments, so there is still some tail risk left. The Danish Debt Management office is tapping in the 5Y and 10Y benchmark today and the US Treasury is selling USD 35bn 2yr notes tonight. A few interesting earnings reports are
due today including Home Depot Inc., Wal-Mart Stores Inc. and Dell Inc.

FX markets: Today's calendar is rather thin and hence the markets are likely to scrutinize the details from last night's bailout package for Greece. Even though the deal was not far from what had been expected, it reduces near-term downside risks to EUR, as Greece will now be able to meet the  20 March debt redemptions. From that perspective we could expect further unwinding of the substantial EUR short positions currently in place. As we have argued previously, however, recent price developments in EUR/USD are not all about Greece, and further improvement in macro data and market sentiment as we expect over the coming months will be needed to propel the pair significantly higher.